Happy Workers, Richer Companies?

There is a free lunch in economics, after all. Companies with perks like complimentary meals clearly outperform competitors in the stock market.
Robert Galbraith/Reuters

You can hear it in the game rooms of Google's Chelsea office, smell it from the ice cream shops on Facebook's Menlo Park campus, and see it with yoga mats aligned on the rooftop of OpenDNS: We are living in an Age of Peak Perk. (Some of us, anyway).

While it's reasonable to consider benefits like free rental cars and dry-cleaning somewhat extreme, there might be a method to perk-madness.

In a 2012 paper, Wharton's Alex Edmans showed that, controlling for factors like industry, firms listed in “100 Best Companies to Work For in America” have outperformed their peers in annual stock market growth by up to 3.8% since 1984. To make sure causality wasn't running the wrong way —i.e.: great stock performance making workers happy—Edmans restricted his study to future returns (e.g.: "by relating satisfaction in December 2001 to stock returns in 2002").

This finding carries an interesting suggestion. Maybe these companies aren't being too generous. Instead, perhaps less indulgent firms are punishing their shareholders by withholding their workers' Essential American Right to free quinoa salad.

If you're like me, this finding might strike you as too good to be true. Happy workers make for richer shareholders? A free lunch premium in the S&P 500? In this age? In this country?

Yes. In fact, the link between satisfied workers and richer companies might be unique to nations like the United States. A new paper by Edmans and two professors from Warwick Business School finds that, in economies with flexible labor markets like the U.S. and the UK, "employee satisfaction is associated with positive abnormal [stock] returns." But in countries like Germany, where rules for hiring and firing are strict, the relationship between happy workers and thriving companies disappeared. In fact, spending too much on employee benefits appeared to be bad for growth.

Does this make any sense? It does if you think about incentives. Under the efficiency wage theory, employees see a happy work environment as a “gift” from the firm, which is reciprocated with a “gift” of greater effort. Studies going back to the 1960s have found that satisfied workers are more likely to work harder because they develop an emotional connection with the office. In America, to drink the free Coconut Water is to drink the corporate Kool Aid. 

In countries like Germany with more tightly regulated labor markets, however, "legislation already provides minimum standards for worker welfare and so additional expenditure may exhibit diminishing returns," the researchers write. When there's no chance of us leaving, why waste the energy to seduce us.

If the Happy Worker Premium is real, should funds treat the “100 Best Companies to Work For in America” as a target list? Older investors might feel a certain sub-Google enthusiasm for serving analysts free seared salmon lunches, but they might be underestimating job satisfaction as a long-term signal of a company's stock growth. As some clever conservative economists have said, if liberals are so sure that higher wages are good for companies—particularly in ways that are not immediately obvious to other investors—then they should heavily invest in high-wage companies, since those firms are theoretically undervalued by the market. An investment group that adopted the Happy Worker Theory might not find it universally applicable—after all, it appears to have no effect in Germany and other countries with tight labor markets—but for tech firms with a large domestic footprint, it might be an investment idea worth exploring. 

To close, there are a few reasons to be skeptical about the power of perks. First, these papers don't prove that happy workers are solely and directly responsible for raising the valuation of their companies. You could just as easily say that gifted managers (a) understand how to retain talent and (b) understand how to grow the company. Or you could argue that many talented workers who are generally indifferent to perks are still more likely to get a job at highly desired companies. Free ice cream truck or no, they'll be happy doing a job where they shine.

Finally, the relationship between job perks and happy workers is not necessarily a straight line. As Rebecca Greenfield explained, savvy workers recognize that all that free food, Epcot-inspired architecture, and on-campus dry-cleaning is designed not only to attract workers, but to keep them working late into the night. Young analysts on Wall Street, for example, have exorbitant access to food delivery. But no Rainbow Roll on earth will make up for a 17-hour day spent with an infinity of Excel spreadsheets. There are some empty spaces that even the finest office perks cannot fill.

Presented by

Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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